Private Equity for Surety Professionals:
What you Need to Know
Presented by:
Helen Lally
Westfield Insurance
February 4, 2014
1
PRESENTER BIOGRAPHY SLIDE
(a paragraph for each presenter)
Helen Lally is the Commercial Surety Leader of Westfield Insurance. She is a surety veteran with
over thirty years of active industry experience. She has specialized in Commercial Surety for more
than 20 years. She has been a presenter at various NASBP Seminars, Webinars and at the William
Angell Surety School. She is a member of the NASBP Commercial Surety Committee and is the
liaison between our association and the SFAA Commercial Surety Committee.
February 4, 2014
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Definition of Private Equity
• Private Equity is an asset class consisting
of equity securities and debt in operating
companies that are not publicly traded on
a stock exchange
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3
Common Forms of Private Equity
• Private Equity Firm
• Angel Investor
• Venture Capital
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Definitions
• Private Equity Firm – an investment
manager that makes investments in the
private equity of operating companies
through a variety of affiliated investment
strategies including LBO, VC and growth
capital.
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Definitions
• Angel Investor – an affluent individual
who provides capital for a business startup, usually in exchange for convertible
debt or ownership equity. Pattern is to see
some angel groups or angle networks to
share research and pool their capital
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Definitions
• Venture Capital – financial capital
provided to early-stage, high-potential,
high risk, growth startup companies. The
VC fund makes money by owning equity
in the companies it invests in, which
usually have a novel technology or
business model in high technology
industries
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The Early Years
• 1946 – American Research and
Development Corp and J.H. Whitney &
Co were founded
• JHW is still thriving and remains privately
owned by its investing professionals and
they continue to provide private equity
capital to small and middle market
companies. They introduced the world to
Minute Maid Orange Juice
February 4, 2014
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The Early Years
• ARDC’s claim to fame was the first major
venture capital success story when their
1957 investment of $70,000 in equity and
$2 million in loans in Digital Equipment
Corp turned into a fortune when DEC’s
IPO in 1966 was such a success. ARDC
was founded to encourage investments by
soldiers returning from WWII. Ultimately
sold to Textron in 1972.
9
February 4, 2014
Legislative Actions
• Business Development Companies were
authorized by the US Congress as part of
the Small Business Incentive Act of 1980.
A benefit here to investors was the tax
pass-through set up to avoid doubletaxation on dividends
February 4, 2014
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History of Private Equity
• Leveraged Buyout – LBO – were active in the
1980’s. LBO’s usually had a ratio of 90% debt to
10% equity. The bonds were usually referred to
as junk bonds. In the 1980’s several prominent
buyouts led to the eventual bankruptcy of the
acquired companies. One of the largest was the
acquisition of HCA by KKR, Bain and Merrill
Lynch for $33 billion. LBO’s were regarded as
ruthless and predatory
February 4, 2014
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Legislative
• Sarbanes Oxley Act of 2002 was a factor in
many publicly traded companies going private.
The expense factor of compliance, especially
on smaller companies was not favorable.
• Hertz, MGM, and Toys’R’Us were a few that
private equity firms invested in and removed
them from the public market
February 4, 2014
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Legislative
• In 2012 , Congress passed the JOBS Act, which directed the
Securities and Exchange Commission (SEC) to implement rules
that, among other things, allow general solicitation and
advertising of private placement offerings that are made in
reliance on Regulation D, Rule 506. Those rules allow companies
and promoters to offer securities through means such as direct
mail, cold calls, free lunch seminars and media advertisements.
• The SEC has implemented some changes here about disclosure for
investors that may have an impact on investors path of support for
developing and mature companies.
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Forms of PE Investment
•
•
•
Senior Debt
– Borrowed money that a company must repay first if it goes out of business.
Even though senior debtholders are the first in line to be repaid, they will not
necessarily receive the full amount they are owed in a worst-case scenario
Senior Subordinated Debt
– In the case of default, creditors with subordinated debt wouldn’t get paid out
until after the senior debtholders were paid in full.
Preferred Stock
– Have no voting privileges but have priority over other subordinate forms of
equity for dividends and claims on the company’s assets in the case of
liquidation
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Largest Private Equity Firms
Name
Headquarters
TPG Capital
Carlyle Group
The Blackstone Group
Kohlberg Kravis Roberts
Warburg Pincus
G S Principal Investment
Advent International
Apollo Management
Bain Capital
CVC Capital Partners
Fort Worth
Washington, D.C.
New York
New York
New York
New York
Boston
New York
Boston
London
February 4, 2014
Capital Raised @ 5/2013
$35.73 bn
$32.82 bn
$29.56 bn
$28.41 bn
$26.00 bn
$24.63 bn
$23.06 bn
$22.07 bn
$19.36 bn
$17.99 bn
15
CDC Example - Corporate
Capital Trust
• Formed on June 9, 2010 and commenced operations on
June 16, 2011.
• Registered with SEC
• @ 9/30/2013 – net assets $1.2 billion
• Investment income $35 million
• 1 billion shares authorized; 127 million issued and
outstanding
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Corporate Capital Trust Holdings
• Senior Debt
– Hubbard Radio, LLC; Guitar Center, Inc., Gymboree
Corp, Avaya, Inc., Sabre, Inc., Office Depot, Inc.,
Bright Horizons Family Solutions, Inc. HUB
International
• Senior Subordinated Debt
– E-Trade Financial Corp, Aramark Corp, Chesapeake
Energy Corp, Neiman Marcus Group, Trans Union,
J. Crew Group, Inc., Cablevision
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Capital Raised 2009-2012
February 4, 2014
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2012 Investments under Regulation D
• Hedge Funds
• Private Equity Funds
• Venture Capital Funds
• Other Investment Funds
February 4, 2014
$386 billion
$159 billion
$ 19 billion
$165 billion
19
Gymboree – Case to Analyze
On November 23, 2010 (the “Transaction Date”), we completed a merger (the “Merger”) with
Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and
Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”) and
Acquisition Sub, a wholly owned subsidiary of Parent, on November 23, 2010 (the
“Transaction Date”), with the Merger funded through a combination of debt and equity
financing (collectively, “the Transactions”). We are continuing as the surviving corporation
and 100%-owned indirect subsidiary of Parent. Investment funds sponsored by Bain Capital
Partners, LLC (“Bain Capital”) own a controlling interest in Parent. The following selected
historical consolidated financial data are presented for the Predecessor and Successor
periods, which relate to the periods preceding and succeeding the Transaction Date,
respectively.
February 4, 2014
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Surety Program Needs
•
•
•
•
•
Multi million U.S. Customs Bond
Self Insurance Workers Comp Bond
Transportation needs – fuel tax, highway use
Various Compliance L&P Bonds
Financial Guarantee Bonds
– Rhode Island Payroll bi-weekly
– Utility Deposit Bonds – Con Ed et al
– Program Total - $23 million
February 4, 2014
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THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
January 30,
2010
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $434 and $388
Merchandise inventories
Prepaid expenses
Deferred income taxes
$
Total current assets
Property and Equipment:
Land and buildings
Leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation and amortization
Deferred Income Taxes
Other Assets
Total Assets
$
February 4, 2014
January 31,
2009
257,672
9,911
121,133
5,315
14,463
$ 140,472
18,735
114,972
4,596
15,108
408,494
293,883
15,776
228,254
192,520
15,776
213,164
183,775
436,550
(231,089)
412,715
(208,488)
205,461
17,417
4,758
204,227
20,850
1,621
636,130
$ 520,581
22
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
Income tax payable
Total current liabilities
Long-Term Liabilities:
Lease incentives and other deferred liabilities
Unrecognized tax benefits
Total Liabilities
Commitments and Contingencies (see Note 2)
Stockholders’ Equity:
Common stock, including additional paid-in capital ($.001 par value:
100,000,000 shares authorized; 29,369,126 and 29,077,446 shares
issued and outstanding at January 30, 2010 and January 31, 2009,
respectively)
Retained earnings
Accumulated other comprehensive income (loss)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
February 4, 2014
$
46,470
69,295
5,381
$
44,400
69,341
102
121,146
113,843
70,859
5,372
67,072
5,391
197,377
186,306
—
—
198,879
239,531
343
175,519
160,178
(1,422)
438,753
334,275
$ 636,130
$ 520,581
23
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
January 30,
2010
Net sales:
Retail
Play & Music
Year Ended
January 31,
2009
February 2,
2008
$1,001,527
13,384
$ 987,859
12,819
$ 909,410
11,404
1,014,911
1,000,67
8
920,814
Total net sales
Cost of goods sold, including buying and occupancy
expenses
(535,005)
(524,477)
(478,020)
Gross profit
Selling, general and administrative expenses
479,906
(316,268)
476,201
(327,893)
442,794
(312,549)
Operating income
Interest income
Interest expense
Other income (expense), net
163,638
728
(243)
610
148,308
1,690
(208)
(151)
130,245
2,609
(179)
769
Income before income taxes
Income tax expense
164,733
(62,814 )
149,639
(56,159)
133,444
(53,113)
Net income
$ 101,919
February 4, 2014
$
93,480
$
80,331
24
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision (benefit) for deferred income taxes
Share-based compensation expense
Loss on disposal/impairment of assets
Excess tax benefits from exercise of share-based awards
Tax benefit from exercise of stock options
Change in assets and liabilities:
Accounts receivable
Merchandise inventories
Prepaid expenses and other assets
Accounts payable
Income tax payable
Accrued liabilities
Lease incentives and other deferred liabilities
Net cash provided by operating activities
February 4, 2014
January 30,
2010
Year Ended
January 31,
2009
$ 101,919
$
37,302
93,480
February 2,
2008
$
80,331
34,854
31,151
(3,841 )
(9,771)
18,462
19,850
16,381
1,336
448
687
2,727
(3,750 )
(6,023 )
(3,330)
2,629
6,440
3,841
8,831
(6,122 )
(6,046)
3,895
(14,874)
(3,865 )
7,408
(1,777)
1,854
(8,113 )
(3,343)
6,659
(7,877 )
2,577
4,843
5,652
3,964
3,694
14,973
1,606
176,595
155,024
107,867
424
25
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
Successor
February 2,
2013
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $216 and
$114
Merchandise inventories
Prepaid income taxes
Prepaid expenses
Deferred income taxes
$
Total current assets
Property and equipment:
Land and buildings
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation and amortization
Net property and equipment
Goodwill
Other intangible assets
Deferred financing costs
Other assets
Total assets
$
February 4, 2014
33,328
January 28,
2012
$
77,910
27,542
197,935
2,903
17,341
31,383
27,277
210,212
3,736
5,532
36,115
310,432
360,782
22,428
174,616
99,120
22,428
146,497
82,606
296,164
(90,839)
251,531
(49,379)
205,325
898,966
580,641
40,040
7,809
202,152
899,097
599,195
47,915
4,646
2,043,213
$
2,113,787
26
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except per shares)
Current liabilities:
Accounts payable
$
Accrued liabilities
Current portion of long-term debt
Total current liabilities
90,133
$
79,027
90,443
94,178
-
17,698
180,576
190,903
1,138,455
1,192,171
40,104
28,681
Long-term liabilities:
Long-term debt
Lease incentives and other deferred liabilities
Unrecognized tax benefits
Deferred income taxes
Total liabilities
7,848
7,898
234,593
245,495
1,601,576
1,665,148
519,687
519,589
(76,231)
(68,389)
(5,914)
(5,825)
Commitments and contingencies (see Notes 8, 9 and
19)
Stockholders’ equity:
Common stock, including additional paid-in capital
($.001 par value: 1,000 shares authorized,
issued and outstanding)
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and stockholders’ equity
$
February 4, 2014
437,542
445,375
4,095
3,264
441,637
448,639
2,043,213
$
2,113,787
27
THE GYMBOREE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
Year Ended
February 2,
2013
Year Ended
January 28,
2012
Net sales:
Retail
$
Gymboree Play & Music
Retail Franchise
Other
Total net sales
1,234,993
$
23,941
13,885
16,730
10,232
-
-
1,275,664
Cost of goods sold, including buying and
occupancy expenses
Gross profit
Selling, general and administrative
expenses
Goodwill impairment
Operating income (loss)
Interest income
1,188,288
(794,272)
(728,346)
481,392
459,942
(411,742)
(380,141)
-
(28,300)
69,650
51,501
177
Interest expense
Loss on extinguishment of debt
Other (expense) income, net
1,164,171
168
(85,640)
(89,807)
(214)
(19,563)
(12)
(109)
(16,039)
(57,810)
(Loss) income before income taxes
Income tax benefit (expense)
5,636
Net (loss) income
(10,403)
Net loss attributable to
noncontrolling interest
Net (loss) income attributable to
The Gymboree Corporation
6,626
(51,184)
2,561
$
(7,842)
5,839
$
February 4, 2014
(45,345)
28
Ratio Analysis

•
•
•
•
•
•
•
•
•
•
Tangible Equity
Stated Equity
Cash
Operating Cash Flow
Gross Profit Margin
Net Income Margin
Interest Expense
IBD/Equity (Tangible)
Times Interest Earned
Retained Earnings
Post Merger
($1,078 million)
$441 million
$ 33 million
$ 73 million
38%
(.08%)
$85 million
2.57
.81
($76 million)
February 4, 2014
Pre Merger
$433 million
$438 million
$257 million
$176 million
47%
10%
$243 thousand
0
677
$239 million
29
Going Forward
• Agent and Surety need to fully
understand the game plan
–
–
–
–
Intent and strength of the investor
Duration of the investment
Exit strategy of the investor
Outside factors to be aware of
• Tax law changes
• Environmental, Safety, Homeland Security
February 4, 2014
30
The Future of Private Equity
Average U.S. buyout fund performance has exceeded
that of public markets for most vintages for a long
period of time. The outperformance versus the S&P
500 averages 20% to 27% over the life of the fund and
more than 3% per year. Average U.S. venture capital
funds, on the other hand, outperformed public equities
in the 1990’s but have underperformed public equities
in the 2000s.
February 4, 2014
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Questions
• If you do not have the opportunity to have
your question answered during the
Seminar, you may contact me directly
– helenlally@westfieldgrp.com
– 330-887-8971
February 4, 2014
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